Dividends and China’s slowing momentum presents potential dilemma for commodity markets

At one time, many of the goods produced in the world came from the US and then a shift to China was made, now if you buy something somewhere along the line there is a Chinese influence. This has been very good for China to bring millions of people towards more middle income status. The Chinese government through its many state companies added the infrastructure abilities to ensure goods can be made in China, shipped by road or rail to a Chinese port to be sent around the world. (from a logistical point of view – looking at the You Tube videos of Chinese ports is inspiring). The result of all the actions is the reality as the economy of China goes so does the cost of commodities. For this reason there is a focus to read and learn how the Chinese economy is doing.

In an article by Clyde Russell of Reuters reported 2 of China’s main Purchasing Managers’ Indexes (PMI) fell in August from July. The Caixin/Markit PMI fell to 49.2 from 50.3 in July going below 50 for the first time in 1 and 1/2 years. The Caixin/Markit PMI focuses more on small to medium sized businesses, while the official National Bureau of Statistics PMI is angled more toward state controlled enterprises.

The official PMI has declined for 5 consecutive months and this has meant the global price of metals has decreased. Copper futures in London have dropped 10.4% a tonne from a high in May of $10,460 to $9,335.

China sold from state reserves a total of 420,000 tonnes of copper, aluminum and zinc. The sales appears to have placed a cap on the rallies in those markets, limiting imports and sending a signal to the broader market that Chinese demand can no longer be taken as an ever increasing given.

Linking to dividend paying stocks, most stocks that pay dividends are not tied directly to a commodity because commodities rise and fall in price. As long as price is more profitable to mine than take out of the ground commodity companies make money. However what goes up comes down and what goes down comes up, there are cycles and if you invest in companies related to commodity prices have alternatives when the cycle changes. If you can invest in companies that are not tied to commodity prices, it means you have less alternatives to consider.

There are more questions than answers, till the next time – to raising questions.

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